Unless I am mistaken, H&R Block will share in much of the risk for its refund anticipation loans during the upcoming tax season.

Block has a relationship with HSBC for its refund products.  Block’s customers are delivered to HSBC for refund loans.  HSBC advances the customer cash based on the expectation that they will have a refund.  In the past, that expectation was backed up by the IRS debt indicator. HSBC won’t have that kind of certainty next year.

My reading of Article IV, Section 4.5, part (a) of this filing, made in March 2010, is that Block will have to refund to HSBC on their losses from RAL advances that cannot be collected.

Tax refunds are going to be very risky without the debt indicator. Last year, a high percentage of refund loans were turned down. Many people have outstanding liens, either for child support or back taxes or for unpaid student loan debt. The debt indicator caught those returns. Now, it’ll be an unknown.

Block shareholders should be paying attention to this situation. HSBC might be one of the world’s largest financial institutions. Block is not.

Although there could be some value in a merger between Block and Liberty, there are also some good reasons to believe that it won’t happen. Here are a few:

• Credit Markets: John Hewitt will have a hard time getting financing for this deal. Right now, investors are risk averse. Even if you think there is a value in a combination, it is still going to be hard to drum up dollars at this time. It doesn’t help that the problems in the economy are complemented by problems within the tax prep sector.
• Regulators might see a monopoly: Block and Liberty, if combined, would control a large portion of retail tax prep. When you consider that Jackson Hewitt might be gone after 2011, the monopoly thesis has even more merit. True, no one said anything when the banks were consolidated.  But let’s be honest – tax prep firms like Block and Liberty don’t have the same lobbyist budget to call upon as do the Big Banks.
• People. There is a problem with the personalities involved: Breeden and Hewitt will never get along. If Tom Bloch wanted to press for a merger, he would have been better off staying on the board.
• Not a fix for the real issue: A merger of two bricks and mortar chains doesn’t address the real problem facing both companies: how do you compete with TurboTax?
• H&R Block doesn’t seem too keen on the deal.Block has some reason to believe that next year will be much better. They will benefit from another year of building the  H&R Block at Home product. Many JTX consumers, having been denied a RAL last year, will probably flock to Block next year. Alan Bennett may not move to Kansas City, but he probably wants to spend some time building the company before he sells.
• Price. The deal won’t make sense if Block’s shares gain. At $14, Hewitt sees possibilities. What about at $17? I’ve heard that some analysts think a fair value is $19. If employment comes back, then Block might right its own ship.

It is not a good sign when the co-founder’s son resigns because he doesn’t agree with the business plan of a company. It is even worse when he goes to the local press to vent his frustration. Unfortunately, that is what Tom Bloch did this weekend.

Bloch told the Kansas City Star “My reasons can be summarized as a disagreement over the direction of the company.” He disagreed with the Board over their decision to buyback 2 million shares last year. It turned out he was right. Since then, Block shares are (more…)

President Obama’s new mandate that all recipients of government checks could be a game changer in the prepaid market. The policy, which makes all recipients of repeat government payments required to accept their payments through direct deposit, should put more Treasury-designed Direct Express cards in the pockets of Americans.

The new rule makes a lot of sense. The motive for this policy, reported by ABC on June 14th, is not driven by a political agenda. Rather, it is just a cost-cutting measure. ABC suggests that it will save at least $60 million per year. Ultimately, it might result in an annual savings of as much as $120 million.

The new rule would go into effect in March 2011.

Where it Will Matter

The idea is that government checks would be sent to “personal accounts,” or would be paid to recipients via Treasury’s Direct Express debit card. That card, issued by Comerica Bank, is the ideal debit card program. It is largely free of fees.

This rule should expand the number of households that put a Treasury Direct card in their pockets. Consumers may realize that this is a great product, and certainly a far more affordable option compared to the products offered by Green Dot, NetSpend, or the Rush Card. That would be bad news for MetaBank, Urban Trust Bank, Bancorp Bank, Columbus Bank & Trust (Synovus), and First Bank of Delaware, all of whom issue debit cards through marketing relationships.

What If

Let’s imagine that these changes, which are currently open for comment, take place. It changes the landscape of prepaid debit cards.

Ah, but let’s just imagine that the rule didn’t exclude payments from the IRS.  Let’s consider a hypothetical: all tax refunds have to go through a bank account or a Direct Express card.  Again, this is all hypothetical, but if refunds were included, it would be the next major disruption for RALs.  I’ve noticed that some tax preparers are already buzzing that this could be coming.

The date is not irrelevant.  Starting after March 2011 means that the new rule would still have a muted impact on RAL demand in 2011. Most RAL and RAC consumers file their taxes as soon as they can. Tax-payers wait as long as they can, while those getting a refund get down to their preparer soon after their W-2s come in the mail.

This would have macro and micro consequences. The issue of tax settlement is still not addressed. How will consumers pay for the cost of their tax preparation.  The motives that are suggested by consumers with the economic preferences that are implicit in the choice to use a RAL are the ones least likely to have the $70 to $200 needed to pay for their tax prep. Perhaps JTX or HRB would be willing to extend credit. Perhaps. That would be quite a feat, though.  Moreover, it would mean that the tax prep business would suddenly become a debt collection business.

On a firm level, the impact of the disruption are even harder to estimate.  H&R Block has a commitment from HSBC to provide its RALs for at least the next years, and at a scale that their current book of business will never extinguish. Jackson Hewitt, on the other hand, has to be scrappy. Their funding with Republic is limited, and by their own estimates, they only had enough RAL funding last year to satisfy about half of what their customers might have wanted. That is one check in favor of JTX, because they may have dodged a bullet.

At the same time, if there is no means for paying for settlement, then tax prep is suddenly a debt collection business. It could require a lot of liquidity to extend credit, even for just 9 days, to millions of consumers. JTX only has $7 million in cash. They just won’t be able to do that. Block, by contrast, has more than $1.7 billion in cash and cash equivalents. That is a night-and-day difference. Liberty’s balance sheets, as a private company, are not readily available. So that is one check in favor of Block.

The last unknown is the degree to which consumers would shop around for a RAL.  Block thought it would have an advantage this year. Having missed that opportunity, they’re now telling investors that they will see a gain next year. Well, maybe. Part of this is an issue of management. Another force, though, is the behavioral impulse of consumers. Many people, upon arriving at their Jackson Hewitt shop and finding out that they would have to wait at least a few days for their refund, still went ahead and filed there. People appear to like continuity, even when it is only a simple return.

The RAL market, as part of the tax market, is about to be disrupted anyway. Jackson Hewitt is about to be delisted. How is that going to help? JTX is already under enough pressure to perform. Their loan with Wells Fargo won’t let them stumble again.

H&R Block’s Q4 Earnings Call is interesting, not just to someone who follows tax preparation, but what the changes at this company tell us about the nature of our larger economy.

Although many would agree with Woodrow Wilson that ‘what’s good for GM is good for the country, and vice versa,” it could also be said that whatever ills plague working people are sure to have an impact on H&R Block. Block is the nation’s largest tax preparer. They file one in every seven returns in the United States.

While they do have a broader range of services than some of the other chains, they still depend upon basic 1040A (more…)